Market for Synthetic Aviation Fuels Off to a Shaky
Start

By Breanne Wagner
May 2008

So say U.S. manufacturers of alternative aviation
fuel, who are beginning to develop novel ways to power aircraft.

Makers of synthetic fuel are eager to offer their
wares to the military as a lower cost and nationally produced
alternative to petroleum-based products.

Chief among the potential buyers of synthetic fuel is
the Air Force, which has trumpeted an ambitious plan to power its
aircraft with alternative propellants.

The service plans to certify its aircraft fleet with
synthetics by 2011 and aims to meet half of its fuel needs with such
products by 2016.

But Air Force officials face roadblocks that are
hampering efforts to stimulate the growth of a fledging synthetic jet
fuel market. While the development of alternative energy technology in
the United States has exploded in recent years, for synthetic aviation
fuels, progress has been much slower.

"The industry is just beginning to grow in the United
States," says William Anderson, assistant secretary of the Air Force for
installations, environment and logistics.

Rentech and Baard Energy were two of the first
companies to announce plans to build synthetic aviation fuel plants. But
their sites won't be ready until 2011 and 2012, respectively.

Other countries are far ahead in this area, including
South Africa, Malaysia and Qatar. "There are at least a dozen [plants]
operating around the world today and another couple of dozen under
construction or in the final planning stages," Anderson says at an Air
Force energy forum in Arlington, Va.

Anderson estimates that every $10 increase in the
price of a barrel of oil costs the Air Force $600 million annually.

Additionally, the development of alternative fuel is
considered a national security priority. At the energy forum,
Mississippi Gov. Haley Barbour, a staunch alternative energy advocate,
claims that the United States is hurting its anti-terrorism campaign by
importing foreign oil.

"The United States is financing both sides of the war
on terror. We're financing our own military and our own economy, and
then a lot of our petrol dollars find their way into the hands of
radical Islamic terrorists," says Barbour.

The Air Force hopes to spur the growth of a U.S.
synthetic fuels market. But a string of policy headaches may prevent the
service from buying the very products it promotes.

A provision included in the 2007 Energy Independence
and Security Act that was signed into law by President Bush in December
contains language that would prevent the Air Force - or any government
agency - from buying synthetic jet fuel unless it is proven to emit less
carbon over the life of the substance than currently used petroleum.

The problem is that no one knows how to measure
that.

"No one has the ability to capture life cycle costs,"
Anderson says.

Without life cycle data, manufacturers of alternative
fuel have no benchmark to go by, says Paul Bollinger, Anderson's former
special assistant.

He says the Air Force was taken off guard by the new
requirement, contained in section 526 of the energy act.

"The Air Force always said it wanted a greener fuel
than petroleum, but we were focused on the production, which is where
most of the carbon dioxide comes from. We weren't talking about the life
cycle," Bollinger says.

Chief executive officers of Rentech and Baard assert
that their fuels are cleaner than petroleum.

The companies have decided to mix traditional
hydrocarbon-based products with biomass - plant matter that can be
burned for fuel - in an attempt to reduce harmful emissions.

Rentech plans to build the first U.S. synthetic
aviation fuel plant in Natchez, Miss., which will produce a blend
derived from petroleum residue called petroleum coke and water sludge,
says CEO Hunt Ramsbottom. Rentech will employ a variation of the
Fischer-Tropsch method to gasify the substances and convert them to
synthetic fuel. Fischer-Tropsch is named after two German scientists who
created the process to convert natural gas or coal to liquid fuel.

Rentech may also experiment with natural gas as the
primary feedstock and blend it with sugarcane, garbage, or wood chips,
Ramsbottom tells National Defense.

The company will avoid using coal as a feedstock, he
says. Industry experts have said fuel derived from coal has enormous
potential because of its abundance, but production of the fuel could
release twice as much greenhouse gas as petroleum, the Environmental
Protection Agency says.

Facilities that use hydrocarbon substances as a
feedstock - including coal-to-liquid plants - will require an expensive
process known as carbon capture and sequestration, which catches the
carbon during production before it can be released into the environment.

Ramsbottom asserts that his company will capture
enough carbon to "produce fuels with carbon footprints that are better
than what it replaces." Rentech's petcoke/biomass fuel could be up to 25
percent cleaner than petroleum, depending on the feedstock mix, he says.

John Baardson, CEO of Baard Energy, says that his
company’s fuel would be 40 to 50 percent cleaner than petroleum, based
on a life cycle analysis.

Baard plans to open its plant one year after Rentech,
in 2012. The company chose to use a combination of coal and wood waste
to make its synthetic fuel, Baardson says. The mixture of coal and
biomass is expected to significantly reduce the carbon footprint and
reduce costs. The company will produce either Jet-A, used in commercial
aircraft, or JP-8, used in military airplanes.

Rentech built a testing facility in Commerce City,
Colo., which was scheduled for completion in the spring. The plant is
expected to produce 10 barrels a day of diesel, aviation fuel and
naphtha (petroleum ether) using a variety of feedstocks, including
natural gas, coal and biomass.

Baard is building an 800-acre coal-to-liquid test
site in Wellsville, Ohio, which is expected to produce 35,000 barrels
per day of jet fuel, diesel and other chemicals. The facility will
capture and sequester at least 85 percent of all carbon dioxide
produced, the company says.

The Defense Advanced Research Projects Agency and
utility provider Arizona Public Service are also studying how to produce
cleaner jet propellants by adding plant oils. Both are looking at
triglyceride oils, such as algae oil, as potential feedstocks because
they do not emit any carbon during production. DARPA program manager
Doug Kirkpatrick says that there are at least 68 different oil crops
that could be used and says the technology is already available to
convert them to fuel. However, critics say that biofuels production is
expensive and results in carbon emissions when the crops are harvested.

Despite industry claims of cleaner fuel, the Air
Force is uncertain if companies can satisfy the new energy act
requirement. Bollinger points to a lack of standards as the main
impediment.

"You heard industry representatives who are producing
this fuel say that they can meet this standard," Bollinger says. "But
there is no standard."

Industry estimates are based on an antiquated EPA
standard that doesn’t measure the life cycle, he explains.

Until those life cycle standards are developed, the
Air Force simply can't buy the fuel, Bollinger says. He believes the
requirement is hampering market development because it deters companies
from building facilities.

The uncertainty associated with the new rule is
viewed as a risk in the market, Bollinger says. Companies need financing
to build plants, but they can't get money until the standard is
defined.

The EPA estimated that it would take at least a year
to write new standards.

Tom Sayles, Rentech vice president of government
affairs and communications, says that besides the life cycle
requirement, the industry has bigger financial concerns. "Long-term
contracts are needed to get this [industry] off the ground."

Today, the military purchases fuel on an annual
basis, Sayles says, while electricity is bought in 10-year contracts.

Additionally, Ramsbottom believes the industry won't
move forward in a timely manner without strong government support. The
Air Force wants to develop synthetic jet fuel as soon as possible, but
is restricted by Congress. Lawmakers are showing greater interest in
alternative energy, but many caution against moving too quickly.

Sen. Jeff Bingaman, D-N.M., who chairs the Energy and
Natural Resources Committee, wants to ensure the Air Force weighs all
the options before purchasing new aviation fuel.

"We need to make sure we're undertaking careful
analysis before making an investment," he says.

Of particular interest is biofuels development,
Bingaman says.

"There are a lot of studies in dispute with each
other on the topic of whether biofuels help or hinder our ability to
reduce greenhouse gas emissions in the transportation sector."

To help clear up the confusion, the committee has
asked the National Academy of Sciences and the National Academy of
Engineering to study the cost and environmental impact of all the
options, Bingaman says.

A draft report is expected in July, with the final
report due by year's end, says David Gray, director of energy systems
analysis with Noblis, a research firm in Falls Church, Va. Gray sits on
the board of the National Academies studies. Noblis previously conducted
a study commissioned by the Air Force and the National Energy Technology
Laboratory to evaluate how much biomass would have to be mixed with coal
to significantly reduce carbon dioxide emissions.

Despite the hurdles, the Air Force and industry are
not slowing down.

Although the Air Force cannot yet purchase synthetic
jet fuel on a commercial scale, an exemption in the 2007 energy act does
allow it to buy fuel for testing.

The service bought its first batch in 2006 from
Syntroleum, an energy company based in Tulsa, Okla. The company has
since closed down its plant. The Air Force plans to purchase 300,000
gallons this year, but has not yet released a bid, Anderson tells
reporters. The Defense Logistics Agency will release two bids on behalf
of the Air Force, one for a coal-to-liquids fuel and the other from any
feedstock. Last year, the service bought 281,000 gallons of
gas-to-liquids fuel from Shell in Malaysia.

In March, the Air Force completed its first
supersonic flight test using a 50/50 mix of petroleum and
Fischer-Tropsch gas-to-liquid fuel. A B-1B Lancer from Dyess Air Force
Base, Texas, flew over New Mexico and Texas, according to the Air Force.
A B-52 Stratofortress and a C-17 Globemaster III have also flown using
the synthetic mix.

The commercial industry also began testing
alternative jet fuels in February when Virgin Atlantic flew a Boeing
747-400 from London to Amsterdam powered by 80 percent petroleum and 20
percent biodiesel derived from tropical oils, says Imperium Renewables,
the company that provided the fuel.